Saturday, January 2, 2016

The U.S. Court of Appeals for the Fifth Circuit recently rejected common law fraud and fraudulent inducement allegations brought by two borrowers arising from their default on a mortgage loan.

In so ruling, the Fifth Circuit affirmed the district court's order granting summary judgment in the mortgagees' favor due to insufficient evidence of damages, and held that alleged misrepresentations in the course of loan modification efforts did not increase the arrearages as the arrearages would otherwise have been due under the terms of the mortgage loan.

Husband and wife borrowers purchased their home with a mortgage loan in 2008 and defaulted in 2011. The servicer then accelerated the mortgage and started foreclosure proceedings.

During initial negotiations to modify the mortgage pursuant to the federal Home Affordable Modification Program ("HAMP"), the mortgage servicer allegedly represented to the borrowers that their loan was ineligible for modification pursuant to Texas law. The servicer agreed to a repayment plan, but the borrowers made only one payment pursuant to that plan and then re-defaulted.

In November of 2011, the servicer informed the borrowers that their loan was in fact eligible for HAMP modification. The foreclosure sale had been rescheduled four times while the parties negotiated, but was then re-set for December 2011. The borrowers submitted the required application materials, but the servicer allegedly told the borrowers their application could not be processed in time to avoid the December 2011 foreclosure sale.

The borrowers sued the mortgagee and servicer in Texas state court in September of 2013 and the defendants removed the case to federal district court. The mortgagee defendants moved for summary judgment and the magistrate judge recommended the motion be granted, except for the claims for common law fraud and fraudulent inducement, reasoning that a genuine issue of material fact existed as to whether the misrepresentation about the loan's HAMP eligibility prevented the borrowers from selling the house or induced them to enter into the failed repayment agreement. The mortgagee defendants objected to the report on the basis that any damages were too speculative.

The district judge rejected the magistrate judge's recommendation on the fraud and inducement claims, reasoning that the borrowers had withdrawn their claim for mental anguish damages and there was insufficient evidence of other damages to withstand summary judgment. The borrowers appealed.

On appeal, the Fifth Circuit rejected the borrowers' first argument that they sustained damages in the form of lost time and postage expenses because the borrowers offered no evidence that they actually incurred the alleged damages or the amount of the alleged damages.

The Court also rejected as too speculative the borrowers' second argument that they were deprived of the opportunity to sell their home because, once again, they offered no evidence that they intended to sell the house and for how much.

The Fifth Circuit then rejected the borrowers' third argument that the servicer's alleged misrepresentations regarding HAMP eligibility caused the arrearage to accumulate because, although the monthly amount increased under the failed repayment plan, the total amount of the mortgage obligation remained the same. Accordingly, arrears were not damages because they were already owed under the original, valid mortgage loan.

The Court also rejected as too speculative the borrowers' argument that they suffered damages in the form of the difference between their monthly payments under the mortgage and the lower payments they would have had after a HAMP modification, reasoning that they offered no evidence that the servicer had offered them one, that they accepted it, or what the terms were.

The borrowers final argument, that the district court erred by not granting them a continuance to allow discovery and an opportunity to amend their pleading, also failed because, reviewing the magistrate's decision for "plain error," the Fifth Circuit found that even if the denial was an obvious error that affected substantial rights, it would not exercise its discretion to correct the error because the borrowers "filed only a one-line request for a continuance without any supporting evidence regarding the need for additional discovery or why existing discovery had been incomplete."

Finding no error, let alone any plain error, the Fifth Circuit affirmed the district court's denial of the continuance and its grant of summary judgment in the mortgagee defendants' favor.

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:

Wednesday, December 30, 2015

The District Court of Appeal of Florida, Second District, recently affirmed the trial court's denial of a third party record title holder's motion to cancel a mortgage foreclosure sale, even though the third party movant acquired title in a prior homeowners association lien foreclosure action, and even though the third party movant alleged that the mortgagee thwarted its redemption rights by supposedly failing to provide an estoppel letter.

In December of 2012, a mortgagee filed a foreclosure action along with a lis pendens against the property owners and the community association that held a lien on the property for unpaid assessments. The lis pendens was recorded in the public records of the county where the case was filed shortly thereafter.

The trial court granted the mortgagee's motion for summary judgment and entered a final foreclosure judgment in March of 2014, which scheduled the sale date for July of 2014. The sale was later rescheduled at the request of the plaintiff for September of 2014.

Two days before the sale, a third party filed an emergency motion to cancel the sale, arguing that it was the owner of record pursuant to a certificate of title issued in July of 2013 in a separate foreclosure action filed by the community association, and that because the mortgagee failed to provide the estoppel letter required by section 701.04, Florida Statutes, the mortgagee wrongly prevented the third party movant from redeeming the property before the foreclosure sale.

The trial court initially granted the third party's motion to cancel the foreclosure sale, but re-set the sale for November of 2014. Four days prior to the sale, the third party filed another motion to cancel the sale on the same grounds as the first motion, but also adding an argument that the notice of the foreclosure sale violated section 702.035, Florida Statutes. The trial court denied motion, finding that the third party movant lacked standing, and the third party movant appealed.

On appeal, the third party movant argued that as the owner of record, it had a clear interest in the property, and thus the trial court erred in finding that it lacked standing to challenge the sale.

The Court first noted the common law rule that unless one is a party to a lawsuit, he or she lacks standing to request relief from the court, but then found that by moving to cancel the sale and asserting its interest in the property as owner, the third party movant effectively sought to intervene in the mortgage foreclosure action.

However, the Court then noted the settled rule in Florida that "when property is purchased during a pending foreclosure action in which a lis pendens has been filed, the purchaser generally is not entitled to intervene in the pending foreclosure action."

The Court found that the notice of lis pendens filed by the mortgagee put the third party movant on notice of the pending mortgage foreclosure action before the third party movant acquired title.Rejecting the third party movant's arguments, the Court reasoned that the purpose of the lis pendens was "developed from a common law doctrine that the result of pending litigation affecting property superseded transactions concerning the property before termination of the litigation."

Because the third party movant acquired title of the property after the mortgagee recorded its notice of lis pendens, the Court held that the third party movant took the property subject to the court's ruling in the mortgagee's foreclosure action, including the foreclosure sale ordered by the final judgment.

The Court pointed out that the third party movant was not asserting that the association's lien, from which its title was derived, was somehow superior to the mortgagee's lien.The Court also pointed out that the mortgage was recorded in 2006, and thus even if the mortgagee had not recorded a lis pendens, the third party movant had constructive notice of the mortgagee's prior and superior lien on the property.

The Court concluded that the third party movant's interest in the property was not legally cognizable and did not confer standing, because even though it held legal title, the third party movant acquired the property subject to the mortgagee's foreclosure action as a matter of law.

Finally the Court rejected the third party movant's argument that its right to redeem the property was thwarted by the mortgagee's alleged failure to provide an estoppel letter, because under section 45.0315, Florida Statutes, which governs the right of redemption, the third party movant could simply pay the amount of the foreclosure judgment in order to redeem the property.

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:

Tuesday, December 29, 2015

The County Court of the 13th Judicial Circuit in and for Hillsborough County, Florida, recently struck a mortgagee's and servicer's offer of judgment in an action under the Florida Consumer Collection Practices Act ("FCCPA"), holding in a matter it deemed of great public importance that the FCCPA preempts Florida's Offer of Judgment statute.A copy of the order is attached.

In May of 2013, a borrower filed a one-count complaint against defendants, a mortgagee and its loan servicer, alleging a violation of the FCCPA.The defendants filed an offer of judgment pursuant to section 768.79, Florida Statutes. In response, the plaintiff borrower moved to strike the offer of judgment.

The defendants argued that the plaintiff borrower's motion to strike was premature because whether the offer of judgment even applies cannot be determined until after damages are quantified.However, the court rejected this argument, reasoning that the motion was not premature because the question before the court was whether the offer of judgment statute applies at all in FCCPA actions.

The court then rejected the plaintiff borrower's argument that the offer of judgment would unduly prejudice him because he would be exposed to liability if he guessed wrong about the strength of his case, finding that was precisely what the Florida legislature intended in adopting the offer of judgment statute -- i.e., to encourage settlement.

The court reasoned that while two appellate court rulings — decided by the Second and Fifth District Courts of Appeals respectively — held that the federal Magnuson-Moss Warranty Act does not preempt Florida's offer of judgement statute, they did not involve either the federal Fair Debt Collection Practices Act ("FDCPA") or Florida's equivalent, the FCCPA, and thus while persuasive, were not controlling.

Nevertheless, the court granted the plaintiff borrower's motion to strike, reasoning that the Fifth District Court of Appeals' decision in Clayton v. Bryan was on point, as it dealt direct with the FDCPA and FCCPA and held that section 559.72 of the FCCPA preempts Florida's Offer of Judgment law, section 768.79, Florida Statutes.The court also found persuasive a 2003 order of the 13th Judicial Circuit in and for Hillsborough County, which held that section 559.72 of the FCCPA provides the sole remedy for cases brought under that Act.

The court added in passing that in the absence of controlling authority from the Second District Court of Appeals, and but for the fact that its decision was not a final order, it would deem the conflict between the consumer protection policies behind the FCCPA and policy of encouraging settlement in Florida's Offer of Judgment statute to be a matter of great public importance and would certify the following question to the Second District Court of Appeals: Does a claim made pursuant to Fla. Stat. 552.72 (FCCPA) pre-empt the application of the offer of judgment provisions of Fla. Stat. 768.79?

A recent examination of the docket (attached) shows no interlocutory appeal was attempted.

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:

Sunday, December 27, 2015

The U.S. Court of Appeals for the Eighth Circuit recently affirmed summary judgment against the seller and originator of mortgage loans and in favor of the purchaser because the originator breached the purchase and sale agreement by refusing to cure or repurchase 8 of the 11 loans.

The plaintiff mortgage loan investor purchased mortgage loans originated by the defendant lender in 2004. The plaintiff's business involved re-selling most of its loans to other investors in the secondary mortgage market.

The purchase and sale agreement required the seller to cure or repurchase any loan that the buyer, in its "sole and exclusive discretion," determined did not conform to Fannie Mae's underwriting requirements or was based on any materially inaccurate information or any misrepresentation.

Between 2004 and 2009, more than 4,700 loans were purchased under the agreement. The buyer determined that 11 of the loans were defective and demanded that the seller cure or repurchase. The seller refused and the buyer sued in federal court to recover the repurchase price of the defective loans as provided in the agreement.

The trial court, applying Missouri law, concluded that the seller breached the agreement and granted the buyer's motion for summary judgment as to 8 of the 11 loans. The trial court also concluded that the buyer acted good faith in determining which loans were defective and disposing of the underlying properties.

On appeal, the seller argued that the trial court erred because there existed genuine issues of material fact regarding whether the buyer acted in bad faith in determining that four of the eleven loans violated the terms of the purchase and sale agreement, and in calculating the amount of damages owed on two other loans. The seller also argued that it was not obligated to cure or repurchase three of the loans because the plaintiff buyer was the underwriter of those loans and was thus responsible for any defects as to those loans.

Relying on its own earlier decision in Residential Funding Co. v. Terrace Mortg. Co., the Eighth Circuit refused to look beyond the plain language of the agreement to second guess the accuracy, materiality, and good faith of the buyer's loan-defectiveness determinations, even though the trial court had done so, given the unfettered discretion conferred by the purchase and sale agreement to the plaintiff buyer on these issues.

The Eighth Circuit found that the seller did not provide any evidence that the buyer acted in bad faith in exercising its clear contractual right to determine whether a loan was defective.

The seller also argued that genuine issues of material fact existed with respect to the appropriate calculation of the repurchase price under the purchase and sale agreement, because the buyer supposedly unreasonably delayed in disposing of the collateral properties by specifically refusing to approve a deed in lieu of foreclosure or a short sale that would have limited the decline in the properties' value and the resulting repurchase price. The seller argues that this conduct by the buyer and the resulting increase in the repurchase price was not reasonably foreseeable to the seller, and was a violation of the buyer's duty to mitigate damages.

The Eighth Circuit rejected this argument, holding that the measure damages — i.e., the repurchase price — was specifically bargained for by the parties and reflected in the purchase and sale agreement. Accordingly, the Court affirmed the district court's summary judgment awarding the repurchase price to the plaintiff buyer as calculated using the formula in the agreement.

Lastly, the seller argued that summary judgment was improper as to three of loans because there was a genuine issue of material fact regarding which party's negligent underwriting caused the loans to be defective.

However, the Eighth Circuit held that the language of the purchase and sale agreement clearly and unequivocally required the seller to cure or repurchase a loan if the buyer, in its sole and exclusive discretion, determined that any loan was "underwritten and/or originated" based on any materially inaccurate information or misrepresentation. The Court noted that the seller originated these loans, and that the buyer exercised its discretion in determining that they were originated based on material misrepresentations.

Accordingly, the Court held that the trial court did not err in granting summary judgment on these loans.

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:

PLEASE NOTE:

The editor and sponsoring law firm of this blog represent and serve banks, lenders, loan buyers, loan servicers, debt collectors, and other financial services companies. We do not represent consumers.

Please note that any communications or information obtained may be provided to our clients, including for the purpose of debt collection.

The information in this blog and related updates is general in nature, and should not be considered legal advice.

Legal advice requires a full and complete understanding of a particular situation. Your situation may involve material facts that prevent the direct application of the information in this blog and related updates.

You will not become a client of the editor or sponsoring law firm simply by reading this blog. In order to become a client of the editor or sponsoring law firm, the editor or sponsoring law firm must agree to represent you in writing. Until we agree to represent you in writing, we are not prevented from representing any other party.

Until you are a client of the editor or sponsoring law firm, any communications with us will not be confidential.

Ralph Wutscher's practice focuses primarily on representing depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, distressed asset buyers and sellers, loss mitigation companies, automobile and other personal property secured lenders and finance companies, credit card and other unsecured lenders, and other consumer financial services providers. He represents the consumer lending industry as a litigator, and as regulatory compliance counsel.

Ralph has substantial experience in defending private consumer finance lawsuits, including cases ranging from large interstate putative class actions to localized single-asset cases, as well as in responding to regulatory investigations and other governmental proceedings. His litigation successes include not only victories at the trial court level, but also on appeal, and in various jurisdictions. He has successfully defended numerous putative class actions asserting violations of a wide range of federal and state consumer protection statutes. He is frequently consulted to assist other law firms in developing or improving litigation strategies in cases filed around the country.

Ralph also has substantial experience in counseling clients regarding their compliance with federal laws, and with state and local laws primarily of the Midwestern United States. For example, he regularly provides assistance in connection with portfolio or program audits, consumer lending disclosure issues, the design and implementation of marketing and advertising campaigns, licensing and reporting issues, compliance with usury laws and other limitations on pricing, compliance with state and local “predatory lending” laws, drafting or obtaining opinion letters on a single- or multi-state basis, interstate branching and loan production office licensing, evaluations and modifications of new or existing products and procedures, debt collection and servicing practices, proper methods of responding to consumer inquiries and furnishing consumer information, as well as proposed or existing arrangements with settlement service providers and other vendors, and the implementation of procedural or other operational changes following developments in the law.

Ralph is a member of the Governing Committee of the Conference on Consumer Finance Law. He is also the immediate past Chair of the Preemption and Federalism Subcommittee for the ABA's Consumer Financial Services Committee. He served on the Law Committee for the former National Home Equity Mortgage Association, and completed two terms as Co-Chair of the Consumer Credit Committee of the Chicago Bar Association.

Ralph received his Juris Doctor from the University of Illinois College of Law, and his undergraduate degree from the University of California at Los Angeles (UCLA). He is a member of the national Mortgage Bankers Association, the American Bankers Association, the Conference on Consumer Finance Law, DBA International, the ACA International Members Attorney Program, as well as the American and Chicago Bar Associations.

Ralph is admitted to practice in Illinois, as well as in the United States Court of Appeals for the Seventh Circuit, the United States District Courts for the Northern and Southern Districts of Illinois, and the United States District Court for the Eastern District of Wisconsin, and has been admitted pro hac vice in various jurisdictions around the country.